Monday, March 27, 2017

We Up and Bought a House

Cayenne doing her favorite thing: chilling in the yard.

It happened: we bought a new home. And we freaking love it already. Through nights of packing boxes, selling things on eBay and craigslist, and bringing carloads of donations to Goodwill, we've managed to get all our worldly possessions from one house to another thanks to some good friends, a couple pizzas, and a lot of hoppy beer. I'm writing this post from the back porch with my dog and a beverage, and it's downright idyllic.

But from a frugality standpoint, this house might not be completely ideal. We spent around $343k for the house, a full $13,000 over what we'd initially set as our maximum budget. And there's a pool: complete with a vacuum and skimmer that run at night, and chemicals that need to be purchased every so often. I think emotions may have gotten the better of us on this one, but we want what we want. On the plus side, the house is exactly what we were looking for: a white kitchen that's already done, with those little scoop handles on the pull-out drawers. Bathrooms that match the kitchen, and a big back yard with a covered patio and a grassy area for the dogs. Basically, it's done. We don't have to paint a wall or turn a screw.

Since this is supposedly a personal finance blog, let's run through some numbers, and a big decision we have to make with our old house.

New Home Purchase:

$343,000 purchase price

$69,000 down payment

roughly $5,000 in transaction costs, initial insurance & escrow, etc.

Approximately $175,000 in additional mortgage debt (compared to the old house) at 4.2% that is mostly (but not totally) offset by the additional investment dollars outlined below.

Old Home Sales Scenarios:

Scenario 1: Traditional sale via a realtor, estimated $230k-$250k sales price, netting between $213.5k - $232.5k after paying 5% realtor fees and investing $5k in repairs/landscaping for a retail sale. After paying off the $98,000 mortgage, we'd have between $115,500 - $134,500 to invest. Our plan is to invest approximately 25% of that in a lump sum, and to dollar cost average the other 75%, monthly, over two years.

Scenario 2: Sell to an investor for $225k (which is the current offer). This would also be the net, as they pay all closing costs, cut out the realtor fees, and require no repairs. After paying off the $98,000 mortgage, we'd have $127,000 to invest.

Scenario 3: Partner with our old neighbors, an architect and an interior designer, to flip the house. Their design is to add 600 square feet with a bedroom and expand the common living space, gutting the kitchen and baths: more or less a total remodel. We each would invest $50,000 into the renovation, split the mortgage, insurance, and utilities for the 6-9 month timeline (approximately $400/month per couple, so $2,400 - $3,600 total), aim to sell for $415,000, paying $17,000 to a realtor, and then splitting the profits. Agreeing to an initial "sales" price of $230,000 (i.e. - the baseline from where our profit is calculated), adding in the $100,000 in renovation costs and the $4,800 - $7,200 in holding costs, each couple would hypothetically net between $30,400 and $31,600 in profit. After paying off the $98,000 mortgage, we'd have between $162,400 - $163,600 to invest. But the sales price could range between $390k and $425k, changing those figures quite a bit.

My heart says to go for scenario three, but it's clearly fraught with the most risk, the most effort, and the most stress over the rest of the year. I'm tempted by the ROI on our $50,000 investment. But I'm even more attracted by the opportunity to build something great out of our first house, and improve the neighborhood. Even though we would not be expected to help in any way with the construction, we'd learn a lot of new skills just by volunteering and watching the renovation. And it has all the allures of a big challenge: something that you're not quite sure you can do, but you just might pull it off, and there's that feeling in your stomach that says, "You can. You should."

But that's just looking at the upside. There's plenty of bad outcomes, too: the renovation goes over budget and over timeline, the sales price is lower than we expected, and no one makes any real money off the deal despite working on it for the better part of a year. The sales price at which we'd actually lose money seems to be anything less than $355k. So long as we sold at that price, we'd get our $50,000 renovation budget back as well as the holding costs, pay the realtors, and we'd be back down to the original $230,000 we agreed upon, only suffering opportunity costs, a lot of headaches, and maybe a friendship if we're unlucky.

Which brings us to scenario two: the easy money from an investor. While it's not a home run, it does get us a quick sale with the property as-is and a pretty crazy return, considering we bought the house for $132,000 back in 2010. My head is telling me this is the smart choice: just take the bird in the hand and be happy with the returns we got. And we could use a little simplicity around now, as we're also trying to sell one of our investment properties (a story for another day) and to start a family this summer. Maybe the stress of a flip is the last damn thing we need.

Scenario one, while definitely the most traditional and straightforward approach, is the least attractive to me. But they do say never to sell your home to an investor, so I suppose I should give the retail sale more consideration.

Well, I've rambled on long enough. As we tend to do, we'd like to ask our smart readers to help us see the forest for the trees, and let us know which scenario you think is the best for our situation. (I keep having trouble with polls in Blogger, so please just leave your choice in the comments below.)

For now, it's time to walk around barefoot in the yard, sip a beer, throw the ball around with Cayenne, forget about all this house selling nonsense for a while, and just enjoy our home. Thanks for reading.

Congrats on the new home! As to the 3 options, that's a tough choice. Why do they say never to sell your home to an investor? The flip sounds interesting but does sound a little risky. I guess if you or your neighbor are knowledgeable about the market then it might work out fine. Although there may be another housing collapse...who knows? Will be interesting to hear about your investment properties in the future...sorry to hear they didn't work out.

Exciting stuff! I'm wary of option three because of so many people involved as well as the city. What about trying to get a little more from option number two would be done with it? If that falls through then you can go to option number one.

Our old home is in Scottsdale, and we'll definitely try to squeeze a bit more out of the deal if we can.

Anecdotal, but a flip just sold for $400k down the street: less square footage than our plan would call for, smaller lot, and it only has a one car attached garage (ours would be a separate 2 car garage).

Still...I think option 2 is the smart play. I definitely appreciate the advice, Sam, as you have a ton of experience with real estate.

Congratulations! I'm so happy for you. Sounds like you got exactly what you wanted with your new place.

I have no advice to offer, but I will share an anecdote. Two houses on my block have sold in the past few weeks, both at what seem like incredible prices to me. Actually, I don't know the final sales prices, but the asking prices and the number of people paraded in and out were incredible. Now, I don't know what the market is like in your area, but here it's blazing hot. Seriously, I keep checking online out of curiosity, and the estimated value of my house is going up at the rate of $2-3K/month!

Anyhow, the lady across the street sold her house to one of those quick sale investors for $198K. The day after she moved out, they put it on the market for $250K - so they couldn't have done anything to it. The listing was full of comments like "house sold in as-is condition" and "bids accepted until noon on Tuesday". There was a steady stream of humanity through that place, and I'm guessing it sold since the listing has closed. I've been eagerly checking the public records to see how much they got for it, but I'd be shocked if it was less than $250K since the online estimates value the place at $267K.

So, I don't know nothin' 'bout nothin' here, but it sure looks like some investor made himself a quick and easy $50K!

Good luck with whatever you decide. I'm sure it will turn out fine! Now go enjoy that yard with your dog! :-)

That's definitely a scenario we're worried about. For what it's worth, our realtor (who originally got us the old house and our new house) told us to go with scenario #2, even though it's the only one he would not make money on. He thinks our home would probably sell for about $240k at best, netting us right around $225 when it's all said and done if we had to do even a little work to get it ready.

But if the investors just turn around and sell it as is, yeah, we are going to feel foolish. We'll definitely try to get an idea of their plans before we sell.

I've heard housing stock is very low partly due to people still owing more than their home is worth, but regardless, buyers are faced with very little choice especially when it comes to a turnkey home which seemingly that is what people like the most. They want to decorate, but not repair. Anyway, fewer homes on the market and low interest rates is causing home prices to rise.

I echo the chorus on congrats on the new house. I would take the 2nd offer. You never know what can happen. You have the money in hand and then you can just go with it. I know the housing market probably won't take a downturn for a bit, but it will slow down again. I just like to take the sure thing and go.

Congrats!!! I'd definitely go with scenario one or two - and two looks the most attractive to me. Three sounds like a heck of a lot of work and risk. SO happy for you guys that you are enjoying the new place!!! Well done. :-)

Even though it's pricey (for frugal folks like us) we are finding a lot of joy in the home. I wonder if there are some exceptions in the benefits of frugality, perhaps for things you use a lot every day like a house?

Wait, did you just say DCA? blasphemous! What happened to "all lump sum all the time"? :P

Being the risk adverse ESTJ that I am, of course I'd pick option 2. Option 3 is probably my least favourite considering the HELL that MMM had to go through when he tried to work with his best friend on a real-estate business (losing 200K in one shot). If you have loads of cash to blow, then taking risks like that is no big deal, but unless I turn into a billionaire, no way I'd do that much gambling.

"Wait, did you just say DCA? blasphemous! What happened to "all lump sum all the time"? :P"

While the math is indisputably in favor of lump sum investing, I don't have to sleep next to math every night for the next fifty years. Happy wife...

I had to negotiate hard to just lump sum the 25%.

I agree that there is a lot of risk in option #3. As there always tends to be with those situations, that's where the big reward is, too.

I am a little surprised with how risk averse the FIRE community seems to be. It's not a good or bad thing, of course: just an interesting trend I seem to notice. We're folks that are doing something pretty risky in one sense, leaving employment so early...so I suppose it's logical that we try to mitigate risk where we can.

But I still thought someone would be in favor of the roughly 100% annualized ROI on $50k...

With option #3 I think you are ignoring the $127k of equity that is already in the deal as far as returns go unless your "Partner" is contributing more than the $50k such as through sweat equity. If not they are riding on your equity - said otherwise they should be giving you half of your equity upfront, or maybe contribute all of the renovation dollars, or change the profit splits so that you get more for your equity. Think about how it would be if you and your friend formed a partnership to buy this property (assume you don't already own it) - would you (DBF) put in $177k ($127k + $50k share of improvements) and get a $98k mortgage that only DBF is responsible for and then only have your partner put in $50k for they will get an equal share of the profits - ie you are putting up or obligated for 84% of the costs ($225 value + $50k improvements + $3600 carry of $332k total potential costs) I want to be your partner then, lets talk, I like your terms.

#3 is a bad deal for this reason alone, not to mention your other concerns.

Oh wow! I'm glad you got the house you love. I am certainly tiring of weekend to-do lists and I hope I can find the perfect move-in ready house for my mother and me so that I finally have some time to just enjoy the weekends again. Which brings me to my opinion of your options, I'd go with #2 and close my eyes so that I didn't find out how much they made off of it. But that's only if I really didn't have time to wait for option #1 and the perfect buyer or option #3 with the year of renovations. I'm feeling tired. You probably are not feeling tired so I think you will go for #3 with the higher risk and higher rewards. Like you said, it's a great chance to learn new skills.

Hey, Daizy. We are probably going with option #2, just to keep it simple and lock in the gains that we can. Option #3 has some great potential return but we have a lot of big stuff coming up (PhD dissertation, selling a rental, starting a family, and there's this whole blogging thing I should start taking more seriously) so simplicity sounds pretty nice. It might also be the smartest financial decision of the three.

I think the key here is that the amount than an investor may gain is irrelevant to your decision. If you believe that your realtor is offering you poor advice, and that you can get more by selling 'retail' then you have noted, what someone else may gain is not part of this decision. What YOU may get in the different options is the relevant piece.

Let's suggest that you sell to an investor for the 225,000 you noted vs 232,500 to a private party, Assuming that you have no tax on the additional gains(because it is a private residence) you would net a possible 7,500 less against months of work and uncertainty with the listing, appraisal, inspections etc. To me, that is a no brainer to go with the cash investor. Get out, and get on with your life!

The other comparison, a partnership with a current neighbor that involves 9 months of renovation, considerable cash investment, the possibility of higher gains at the end... yeah. I wouldn't do that one if you paid me. The theory would be that over 9 months you'd get a payout of 30,000 if I'm reading your numbers correctly and that sounds sweet... unless the architect wants to be paid for his contribution of time/plans, or the house sells for less, or just doesn't sell or even sells at a loss after the additional funds are used. And then your moving away... but he will still be there! How much of a say does he get choosing his new neighbor? Is he getting a higher percentage because he is still onsite? How will you funnel the money to him? Not as an owner, or you are going to be in a real grey area come tax time as far as it being a personal residence. As a contractor? Then he has to pay all his own business taxes, how will he feel about that? Who pays if the house is broken into during that time? What if there is an issue, such as a burst pipe, that is not related to the construction? Or if a foundation crack is discovered during the inspection process? I would rule that option out immediately unless there was a significant need for the funds, and then I'd STILL borrow the needed capital and go it alone. Hiring a designer is going to be considerably cheaper than going splitzies with an architect.

RUN from that situation! I actually know a lot of builders who get into trouble this way. At least two of them still own houses (or did last I saw them) that they had to hold as rentals for years with previous partners because of a down turn and exceeded costs.

If it weren't for DbF Jr making an entrance into to the world soon if all goes to plan then I would have said option 3 for sure!

As things stand though I'd lean toward option 2. Although it has been said to never sell to an investor it doesn't sound like they're going for an instant flip (is there any way you can probe about this to find out though?) and seem to be offering a solid price compared to what you might receive after all the fees etc with option one.

Is there no way of selling a house in America without going through a real estate agent? I find this very odd if that is the case. There are plenty of websites over here which let you advertise your house for pennies in comparison to realtor commission rates.

You can definitely sell without using an agent (here we'd just call it For Sale by Owner). But since most buyers are using an agent (the seller pays both parties' realtors) your house would not be seen by a lot of buyers, so the market of potential buyers is a lot smaller.

Anyway, we're definitely trying to get the most net out of the deal while still ending up sane by the end of it all. :) And thanks for the congrats! I have been in the pool every day since moving in...I love it.

Maybe you could do a mini make over, do cosmetic stuff and buy a load of 'fru fru' (cushions, curtains, throws, rugs) etc to smarten your old place up. Honestly a bit of hard work just doing that would add on a good few thousand. Remember people buy with their heart and that's what investors (who would be looking to flip your house would do). Great new place let us know when the party is.I also vote no to #3.

Hi there, I'm a new reader to your blog. Great post. I'm hoping I can share some insight. And sorry in advance if this has already been said, I did not read though all of your comments.

So we live in Austin and I have renovated two 100 year old historic bungalows in the past 3 years. The first one was an incredible return. We purchased for $372K, put roughly $400K into it and then sold last August for $1.4MM. In almost cost me my very strong marriage and put a huge strain on my career, my wife's career and our 4 young children.

The experience gained was wonderful, the profit was great (we had great timing and a great market and didn't intend to sell so we spared no expense) but you MUST factor in the cost to your family and overall life. I would be vary wary of partnering with neighbors for something like this, its sounds fraught with potential downfalls.

Also we sold that $1.4MM house with no realtors on either side. We also bought our next home we moved into for $1.4MM with no realtors on either side. And just TODAY, my wife and I closed on a 6 unit rental property with no realtors on either side.

If you don't go with option number 2 (which sounds like a very solid option), I should strongly recommend selling FSBO. If you're not confident enough to sell FSBO, you have no business feeling confident enough to flip a house with partners. FSBO is MUCH easier.